Profiting from a falling Aussie dollar with options

The Australian dollar saw significant decline after the news of lowered demand in the country’s consumer retail sector. Falling lower than analyst expectations of 0.1%, Australian Bureau of Statistics reported a decline of -0.4% for the month of March.

External sources such as China also reflect negatively on the country’s exports because of a strong exchange rate and unattractive numbers for the giant’s manufacturer index. To battle the 30-year-highs of the currency, Reserve Bank of Australia decided to cut rates down to 2.75% from 3%.

Reflecting the lower demand, miners in Australia are taking actions to scale back their investments and bring down operating cost. Mining sector alone represents 10% of Australia’s overall GDP. Along with the lowering need for oil, the AUD is facing weakness from a few different sectors in its economy and has weak outlooks for the near future.

With these recent events how can a trader position themselves to take advantage of a falling Australian dollar?

Shorting spot AUD/USD. This is the most direct way to take a bearish view of the AUD, but can be capital intensive and would require a trader to take on a lot of risk when taking a medium- to long-term view.

Short the ETF. The CurrencyShares Australian Dollar Trust (FXA) tracks the price of the AUD very well, but is the most capital intensive way to trade the AUD. The risk required to take a long term trade is also high.

AUD futures and options on futures. Provides leverage while still allowing a trader to set up a well-defined risk vs. reward setup.

With the June at-the-money straddle implying a move of around 0.0170, we can calculate a downside target of around 1.00. Buying put spreads here looks a little expensive so selling an at-the-money call spread will offer a better risk vs. reward setup. This trade will also profit if the underlying stays flat.

About the Author

James Ramelli is the Moderator of the Live Futures Options Trading Room at KeeneOnTheMarket.com where he actively trades futures and options on futures while educating members on strategies, setups and risk management. He has a degree in Finance with a focus in Derivatives Trading and Financial Engineering from The University of Illinois and has been trading for five years. James appears regularly on Bloomberg T.V. and BNN and writes a weekly column for Futures Magazine.